Value Investor Arnold Van Den Berg Explains His Version of Value Investing
Arnold, please tell us about how you got started in the money management business.
I began my investment career in 1968 at John Hancock Insurance and later moved to Capital Securities as I wanted to help clients save for their retirement. The year 1968 also happened to be the peak of the stock market. While the market experienced a bear market rally in 1970, its general trend during my first six years in the business was down, finally hitting bottom in 1974. This was the worst decline since the Great Depression, and as you can imagine, the mutual funds in which I had invested my clients’ money had also gone down dramatically. It was a very painful time for me and it caused me to rethink my investment strategy. I began to study many investment philosophies to try and gain a better understanding of why so many managers went down so much for so long. What I discovered was that value managers, such as Benjamin Graham and particularly his disciples, both protected their clients' capital better and provided more consistent investment results than managers using other investment strategies. In addition, value investing resonated with me on a personal level as it was, and still is, consistent with how I live my personal life. So in 1974, at the bottom of the market, having finally found an investment philosophy I could believe in, I decided to start Century Management. At that time, I figured I was either going to make a lot of money or it was going to be the end of the world.
Please describe how Century Management has grown over the years and tell me a little about your staff.
Today, Century Management has 42 employees and roughly $2 billion in assets under management. My son Scott, who has been with the firm for 20 years, is the company president and chief operating officer, and my son in law, Jim Brilliant, who has been with the firm for 26 years, is our co chief investment officer and chief financial officer. I continue to hold the role of co chief investment officer and CEO. We have a very close family, so it has been great working with Scott and Jim over the years to build the business and manage the clients’ portfolios. But we have an entire team of very dedicated people working hard each and every day that make this company successful, and I am very proud of them all. They, too, are like family. As a matter of fact, CM’s average employee has been with the company for more than 11 years. This is an experienced team as well. Our average employee has over 19 years of industry experience. In concert with our company policy, every employee has the vast majority, if not all, of their taxable investable assets and 100% of their company pension plan assets invested in the same securities as our clients. Embedded into our firm’s culture is the belief that we should align our own personal investments with those of our clients. I have alwaysfelt that this goes a long way toward removing conflicts of interest, and it keeps everyone focused on doing what’s right for the client.
Please tell us more about your private management versus your mutual fund products and strategies.
Of our $2 billion in assets under management, approximately 88% of our business is conducted through the management of individual client accounts. Our clients are typically individuals and families with joint accounts, IRAs, and trusts; businesses with corporate accounts and retirement plans; and partnerships, foundations and institutional accounts. The other 12% of our business is conducted through the CM Advisors Family of Funds, of which we are the advisor.
Our flagship private account strategy is our all cap value strategy that we refer to as CM Value I. It dates back to 1974 and was the strategy I used when I started Century Management. However, over the years as clients expressed different investment needs, we applied our value investment discipline to a variety of other strategies, including two large cap value strategies, two small cap value strategies, three balanced strategies, and one fixed income strategy.
Why do you believe that value investing is a better way to manage money?
Value investing does not appeal to the masses. If it did, you would never be able to buy a bargain. Stocks selling below their intrinsic value or below what an experienced businessman knows his company is worth, bargain stocks, are usually only found during times of great uncertainty. Because of the fear surrounding uncertainty, many people are willing to sell stocks well below their intrinsic values and often times at bargain basement prices. Typically this happens because a company, an industry, or in some cases the market at large has a problem, which is usually temporary. Regardless, history has proven that investors who buy these bargains will frequently be rewarded when the uncertainty clears. This is as fundamental as it gets, and you can use this approach for any investment, whether it’s stocks, bonds, real estate, commodities, or a private business. As Benjamin Graham said, “Price determines return.” And, as his famous disciple, Warren Buffett, stated, “Uncertainty is the friend of the long term investor”.
What is your approach to value investing?
Jim Brilliant, our co chief investment officer, explains it best when he states that the main focus of our investment philosophy is to recognize and capitalize on value gaps. Simply put, the value gap is the difference between the price of a stock and the underlying value of the business. Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run it’s a weighing machine.” That’s exactly what he was describing.
He was describing how in the short run, market gyrations move stocks all over the place, but the underlying value of the business is what defines the price over the long run.
As an example, let’s take a cyclical company with a strong balance sheet. These are some of our favorites. We know at the bottom of the cycle, it generally loses or doesn’t make much money, at the top of the cycle it’s making a lot of money, and in between it is growing its earnings appropriately.
On Chart 1, I have isolated the tangible book value per share for our sample company, which is one of our favorite 14 valuation metrics that we use to value businesses. Tangible book value, for those not familiar with it, consists of all the assets of a company minus all the liabilities, which gives you the net worth or book value of the company. From there, you subtract the value of goodwill, patents, and copyrights, and what you have left is tangible book. Looking at Chart 1, you can see that while there have been ups and downs along the way over the past 20 years, the tangible book of our sample company has grown rather steadily over time. Now it’s cyclical, so there are some ups and downs. But, over 20 years, through all the economic ups and downs, the tangible book has grown pretty nicely over time.
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